Arcane Topics in Economics and Philosophy, Interspersed with Various Distractions

June 11, 2011

Keynesianism on Crack

The White House is mulling a temporary cut in the payroll taxes businesses pay on wages. White House advisors figure this may appeal to Republican lawmakers who have been discussing the same idea. It would, in essence, match the 2 percent reduction in employee contributions to payroll taxes this year, enacted as part of the deal to extend the Bush tax cuts.

Other ideas under consideration at the White House include a corporate tax cut, accompanied by the closing of some corporate tax loopholes.

Can we get real for a moment? Businesses don't need more financial incentives. They're already sitting on a vast cash horde [sic] estimated to be upwards of $1.6 trillion. Besides, large and middle-sized companies are having no difficulty getting loans at bargain-basement rates, courtesy of the Fed.

In consequence, businesses are already spending as much as they can justify economically. Almost two-thirds of the measly growth in the economy so far this year has come from businesses rebuilding their inventories. But without more consumer spending, there's they won't spend more. A robust economy can't be built on inventory replacements.

What Robert Reich seems never to have imagined is that the market has an ability to adjust naturally. Even when demand is not growing for the time being, there is still an immense amount of it out there. If companies have so much cash, they could use it to invest and compete for market share, and earn a better return on capital than the zero or less that they get on cash. This would boost demand and create jobs. If this is not happening-- if companies prefer hoarding their cash to investing it-- we can infer that there's something that makes businesses doubtful about whether they will enjoy the returns on their investment. What this might be is not far to seek. We're running deficits of 10% of GDP. The government has no plan to bring this under control. There seems to be a bipartisan refusal to contemplate raising taxes on the middle class. Instead, two big tax hikes on the rich-- for ObamaCare, and the expiration of the Bush tax cuts-- are already scheduled. Meanwhile, ObamaCare is leading to a sort of breakdown in the rule of law as Obama keeps issuing exemptions to favored states and companies in order to mitigate the damage done by the law, and also in the form of bailouts and other forms of intervention. This creates new methods of de facto confiscation by the government: not just taxes and regulation, but political favors to competitors. Where is all this heading? Until that picture becomes clearer, it's best to keep one's money is as liquid a form as possible.

Supply-side economics doesn't work. It's been tried for thirty years, to no avail. And now, when our continuing economic crisis is so palpably being driven by inadequate demand, it's more bogus than ever.

What on earth is Reich talking about? The past thirty years (before 2009) have been widely lauded as the "Great Moderation," during which we enjoyed consistently stable prices and low unemployment. They may not have been paradise, they may not have been the best we can do, but they were certainly far better than what we have now. We need to get back to that. If Reich is writing off the last thirty years as "to no avail," what does he want, and why does he think it's possible? Even Keynesians are supposed to understand that their prescriptions apply only in the short run. Do Keynesians denounce such parodies of their doctrines?

Comments

Critics of supply-side economics have actually felt pretty vindicated recently, and I have to agree that the figures would tend to support them. By 'supply side economics' I don't refer to simply the idea of encouraging investment & etc, with which of course I agree, but rather to the 'voodoo economics' version in which our movement on the laffer curve means that lowering taxes increases/doesn't decrease revenues because it spurs extra economic activity. That was a plausible (if far-fetched) idea in the 80s when the federal tax rates were significantly higher than they are today, but certainly not now - especially given that periods of lower tax rates correlate* with periods of lower growth.

Of course, I think the Keynesian folks are thinking "well, their version didn't work out, so that means ours is proven!" which is also bogus. Still, I understand why they are just as confident in their construal of events as Nathan is in his.

If Keynesians are feeling vindicated after stimulus left us with three years of 9% unemployment, after almost thirty years of low unemployment under non-Keynesians, I guess they're never going away. *sigh*

re: "especially given that periods of lower tax rates correlate* with periods of lower growth"

I don't quite understand the point of this claim. If spending is held constant (statistical tests should control for this), lower tax rates will tend to mean higher deficits. So what this says is that deficits are worse for growth than taxes, no? Keynes, by contrast, was in favor of deficit spending. So if this correlation is valid, it's just more evidence against Keynesianism.

Keynes was never for deficit spending ceteris paribus, only to moderate the business cycle. Thus, deficit spending would only happen during short periods of relatively low/negative growth. Tax rates tend to stick around for longer bands of time that last through an entire cycle or more. It's by those bands of time that lower taxes have coincided with lower growth.